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The Exit Strategy Handbook – Valuing your business

Sep 10Jeff Matthews

We are exploring the recently released book, “The Exit Strategy Handbook” by Jerry Mills, the founder and managing partner of B2B CFO®.  

I have worked on over a dozen transactions in my career and can attest that valuing the business can be one of the most difficult issues for both sides of the transaction.   Sellers often believe that their business is worth more than the available buyers are willing to offer.  Buyers don’t want to pay too much but want the targeted business.

In “The Exit Strategy Handbook”, Mills spells out a number of valuation methods.

  • EBITDA Method
  • Discounted Cash Flow Method
  • Comparable Company Method of Valuation
  • Comparable Transaction Method of Valuation
  • Asset Accumulation Method
  • Acquisition Debt Value
  • Liquidation Value[1]

 

Each method has its proponents and buyers often have preferences as to how they view the value of a company.  The company’s status can also play into the valuation.  If a company is in a distressed situation due to the loss of a key customer, patent, key employee or owner, etc., the valuation will be impacted.

 

“The Exit Strategy Handbook” and associated dashboard software focus principally on the EBITDA method as a very common valuation technique.  EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization.   These adjustments are made to net income to remove the impact of financial structure policies.  Some valuation experts replace D&A with recurring capital investment.

The EBITDA valuation is normally adjusted for expenses and revenue that will not be relevant to the on-going business.  “The Exit Strategy Handbook” contains an extensive listing of these adjustments beginning on page 54 and I will explore them in a future blog.  These adjustments can run the gambit from replacing rent paid to the owner with a market rate rent, removing expenses that may be personal in nature, to sports tickets that the seller wishes to retain.

Multiples are used to modify the adjusted EBITDA number.   Typically a strategic buyer who understands the industry will pay the highest multiple.  These buyers can fold the operation into their existing company, saving duplicative costs and gaining immediate synergies.

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B2B CFO® has over 200 experienced chief financial officers have deep knowledge of transactions and business improvement that can be tapped to help you sell your business.   You can explore the backgrounds of our team at www.B2BCFO.com/index.php?page=cfo-directory .


[1] Mills, Jerry L. (2013). The Exit Strategy Handbook. ISBN 978-0-09886932-1-0, Jerry L. Mills and B2B CFO, LLC., pp.12

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